Commercial Banking Systems: The Neglected Variable in Political and Economic Development

This study underscores the strategic role – both political and economic – of banking sector reform in the overall pursuit of economic development and democratization. It compares trajectories of banking sector reform in Middle Eastern and African countries that have remained on the margins of the new global economy. A close look shows that their governments’ willingness to embrace reform has differed across contexts, as has the extent and pace of reform. Meanwhile, the effects of reform – whether and how legal change produced the developmental changes predicted by liberalization’s proponents – have also been very uneven. We model this variation in reform trajectories and its outcomes, propose a theoretical explanation for it, and use a set of case studies to illustrate the contrasts and causal dynamics that we have identified. Our main claim is that structural features of national political economies go far in defining actual trajectories of banking sector reform and liberalization. Structural features of national political economies that we define as key are the strength of indigenous private sector, and how it is linked to the state and foreign capital. The politics of banking reform is deeply conditioned by alreadyachieved levels of financial sector development (including the local embeddedness of law and of the market itself) and private capital’s diversity, strength, and political autonomy vis-a-vis the state. We propose a typology of banking structure and reform trajectories and use case studies from the Middle East and Africa to illustrate variation in the politics of banking sector reform. Henry and Boone, Commercial Banking Systems, APSA 2001